It is fitting that a new Bretton Woods is being discussed now. The original Bretton Woods institutions were created after the second world war in recognition of the fact that even developed countries can experience liquidity crises and that global efforts are required for economic development. In the throes of the current, formidable economic crisis, it is appropriate to consider the ways in which the international economic system can be reformed to govern globalised financial markets and inter-linked economies.

Although there have been calls for some time for the current international financial institutions (IFIs) to be more representative of emerging economies, it took this financial crisis to underscore the extent to which the global economic structure has changed. Namely, the global imbalances which permitted the west to access cheap credit despite its low saving rates, particularly the US and the UK. The worst banking crisis since the Great Depression strongly suggests that a global rules-based system is necessary to oversee financial markets and coordinate economic management. The issues are rather different from those of the Bretton Woods era, and would require further development of international economic institutions and laws to govern an increasingly multi-polar world economy.

A new Bretton Woods has to be accommodative of the shifting global economic weight toward emerging economies, but also able to act quickly to stabilise financial markets. This would require promulgating international economic law and regulations as well as reforming the current international financial institutions, such as the IMF.

The financial crisis has revealed the extent of the inter-linkages among markets, making it apparent that cross-border dealings require regulation. For instance, there should be an international clearing house for financial transactions and also a body to monitor cross-border capital flows. The latter of which could be under the auspices of an institution like the Bank for International Settlements (or BIS, which is the central banks' bank) with power to demand greater transparency in financial dealings in all major markets.

This need not be more burdensome than what national regulations already require, though clearly reform is needed there as well. The resultant multi-level system of governance could be modelled after federal regulatory systems such as in the US. However, regulation cannot be the entire answer, as active engagement by regulators will always be needed since written rules are unlikely to keep up with innovative markets. In a new Bretton Woods system, there should be regulators operating under the auspices of an international regulatory framework to monitor world markets.

Second, banks are indeed global or at least regional, as in Europe, so there should be a coordinated and efficient deposit insurance scheme up to a widely accepted limit so that confidence is assured and bank runs are not a possibility even if there are bank failures, as is the system in the US.

Third, the existing international institutions continue to have important roles, but need reform, including expanding their memberships to reflect the shift of global economic power to the east. Even before this crisis, there was much talk about increasing transparency and accountability in the IMF in particular. As a provider of liquidity when countries are in trouble, it is telling that Iceland and Pakistan were reluctant to seek their assistance and turned instead to the emerging powers of Russia and China, respectively.

Similar reforms to strengthen the mandate of the World Bank would also be warranted. Fourth, a likely response to looming national recession is an increase in protectionist sentiment, evidenced in the Smoot-Hawley Act passed in the US in the great depression which had the effect of slowing global trade and worsening the economic downturn. Any new Bretton Woods system should encompass reforms to the World Trade Organisation (WTO). The WTO helps to establish a rules-based system for trade and should work to ensure that trade is not disrupted by protectionist tendencies that can arise in times of crisis. Its operation in the past decade suggests that it is a fairly efficient forum for resolving disputes, though the Doha round extending its coverage to more traded goods and services has stalled. Enhancing the WTO should be part of any new system so that rules rather than power (and politics) are the premise of international trade; in other words, the development of international economic law.

Finally, an international body or forum cannot force its mandate on sovereign nations, but must appeal to the mutual self-interest of countries in maintaining stability by, for instance, monitoring the development of the so-called global imbalances which led to excess liquidity and mis-priced risk. The onus cannot entirely be on one country, as macroeconomic forces are intertwined, eg if the US didn't consume so much, then China would not be such a significant lender.

A new set of Bretton Woods institutions that identified these economic flows and assessed their consequences would help policymakers coordinate responses to try and lean against future asset bubbles. Indeed, the next one could be in emerging economies as cheap currencies and trapped domestic savings fuel housing bubbles even as interest rate cuts to stimulate the west promote global liquidity searching for the next investment opportunity, which will be in Asia in the next couple of years. It is therefore in the interest of all countries to have a system of international economic law and associated institutions, and a new Bretton Woods would be a positive legacy of this financial crisis.